Why Avoiding the Stock Market Could Cost You

For many investors, the stock market can seem like a roller coaster—exciting at times but terrifying when the inevitable downturns occur. Given the market’s constant fluctuations, some people choose to sit on the sidelines, keeping their money in cash or high-yield savings accounts (HYSA) rather than investing in the market. While this approach may feel safe, the long-term consequences of sitting out the stock market can be detrimental. Avoiding the stock market for fear of losing money can be a costly mistake.  

Timing the Market Isn’t Worth It

Many investors try to time the market, hoping to buy stocks at their lowest and sell at their peak. However, even professional investors struggle to consistently time the market correctly. This is why one of the most impactful investment choices you can make is simply to get started.  

Sitting out of the market waiting for the ideal time to buy means you may miss out on upswings, which often occur unexpectedly. Missing even a couple of the best-performing days in the market can drastically reduce your overall returns.

For example, imagine that you put $10,000 into the S&P 500 in 1990 and left it untouched through 2020. That investment would have grown to well over six figures.  

However, missing the 10 best days during that thirty-year period would have cut your returns by almost 50%.  

Since the best days often follow the worst ones, sitting out during market downturns may increase the risk of missing substantial recoveries. Worse still, trying to time your investments means you may end up doing exactly what you hope to avoid—buying at the high point.

We suggest making strategic investment choices. Let the market work for you rather than trying to work for it.  

Understand Bear Markets

Just as trying to time the market works against you, so does a fear of bear markets. You may have seen the iconic bull statue on Wall Street—bull markets, or markets in a positive, upward trajectory—are generally lauded by investors for their returns.  

Bear markets, on the other hand, can sound scary. They are important, natural parts of the stock market cycle, though. Historically, markets have always recovered from downturns, and those who stay invested typically benefit the most.

For example, the 2008 financial crisis led to a nearly 50% drop in the stock market. Many investors panicked and pulled their money out, locking in their losses. However, those who left their money invested saw their portfolios recover and even thrive in the subsequent bull market. In fact, the S&P 500 gained more than 400% from its 2009 low to its 2020 high.  

We saw the same thing happen in 2020 as stocks entered a bear market following the onslaught of COVID-19. Investors who pulled their money at the low point fared far worse than those who stayed invested and experienced the bull market that shortly returned.

As Warren Buffet famously said, “be fearful when others are greedy and greedy when others are fearful.” Don’t let your worries about bear markets keep you from investing.

Inflation: The HYSA Killer

One of the other most common mistakes investors make is avoiding the stock market in favor of “safe” investments. A big danger of staying in cash or low-return investments is the erosion of your purchasing power due to inflation. Over time, the value of your money decreases as the cost of goods and services rises. While cash and HYSAs offer the allure of stability, they often fail to keep up with inflation and do not offer strong returns.

Historically, the inflation rate has averaged approximately 3% per year. If you hold your money in a HYSA earning 4% interest, you are effectively only gaining 1% in annual returns. Contrarily, the stock market has historically provided an average return of about 7-10% annually after adjusting for inflation.

The Best Time to Invest Is Now

Sitting on the sidelines of the stock market can feel safe, but it can lead to missed returns. The best time to start investing was yesterday—the second-best time is today. Consider taking advantage of the market’s long-term growth potential.

By overcoming fears, embracing market fluctuations, and understanding the natural downturns of the market, you can set yourself up for financial success and avoid the pitfalls of staying on the sidelines.